Cheapest to deliver bond

[doobsmeister]

Why is the cheapest bond to deliver the chosen bond to deliver? When I ask this, it says that the bond with the highest cash flows are the bonds that should be delivered and considered “cheapest.” I understand they are cheapest in the point of view of the person going long futures, but if you held a high yielding asset, wouldn’t you want to keep it and not deliver it? I would certainly want to deliver the lowest yielding asset.

 

[S2000magician]

Presumably, the short will purchase the bonds, then deliver them to the long. The short will choose the bonds with the lowest price – the cheapest bonds, if you will – to deliver to the long; hence: cheapest to deliver. Short maximizes his return that way.

 

[doobsmeister]

Got it. Thanks magician

 

[S2000magician]

My pleasure.